End of the Paper Trail: Funds, Forests Win in Battle of the Bulk Mailings

By

Daren Fonda

June 7, 2018 12:48 p.m. ET

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In the battle against paper, mutual-fund companies just scored a big win. Under a new rule announced by the Securities and Exchange Commission on Tuesday, registered investment companies won’t have to send printed shareholder reports through the mail, starting in January 2021. Investors will get a mailed notice that the reports are available online. If they want a report on paper, they’ll have to opt in.

Just about every other aspect of fund communications and data have already gone online—from electronic delivery of prospectuses to quarterly performance reports and updates of holdings. The default mailing requirement for shareholder reports was a vestige of the pre-digital era.

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But more than 90% of households that own mutual funds now have access to the Internet, making paper delivery increasingly obsolete. The new rule covers mutual funds, exchange-traded funds, and other funds issued by registered investment companies. The SEC billed it as a way to “modernize” shareholder reporting and “improve investors’ experience,” while reducing printing costs that are ultimately borne by investors.

SEC commissioner Michael S. Piwowar, who voted for rule change, billed it as “better late than never.” He also characterized it as a win for the environment. Fund companies send more than 440 million pieces of paper a year for the reports, costing 2 million trees their lives. “How many forests have been felled—how many woodland creatures have lost their homes—in order to supply the millions of reams of paper required to produce registered investment company shareholder reports?” Piwowar said in a statement.

The fund industry, which lobbied hard for the rule change, is thrilled. Going electronic could save $2 billion in printing and mailing costs over 10 years, according to a 2015 estimate by the Investment Company Institute, an industry lobbying group. Whether fund companies save that much will depend on how many investors choose to receive paper or go for e-delivery. But overall, “the rule change makes sense,” says Susan Olson, general counsel for the ICI. “It will save shareholders money, and it saves trees.”

Investor advocates weren’t so supportive, initially, arguing that retirees and others without access to the Internet may lose access to important fund disclosures and information. But Charles Rotblut, a vice president at the American Association of Individual Investors, says the mailing of notices and opt-in mechanism address those concerns. “It strikes a good balance,” he says. “Investors who aren’t comfortable reading documents online can still see paper copies, and fund companies won’t have to send paper to every shareholder, many of whom wouldn’t read the reports anyway.”

Using less paper doesn’t help the timber industry, of course, which lobbied hard to keep the old rules, as did politicians from big forestry states. A proposal to scrap the mailing requirement died in 2016 under the previous SEC chairman, Mary Jo White. At the time, Senator Susan Collins of Maine—where forestry is the largest industry, contributing more than $8 billion a year to the state economy—warned that a change allowing electronic delivery of reports would create “confusion and potential financial discord among the Americans who receive these financial disclosures.” (Collins’ office did not respond to a request for comment).

But the timber industry may not be bothered anymore. All those trees won’t really be saved—they’ll just be used for other products. Indeed, companies such as International Paper (ticker: IP) are thriving as demand for industrial packaging, containerboard, pulp and related products rises with e-commerce and global economic growth. Paper demand has been falling for 20 years, but firms are finding other ways to boost sales and margins.

Paper and forestry stocks have been winners. International Paper returned an annualized 10% over the past 10 years, beating the 9.2% return of the Standard & Poor’s 500 index. The stock was up 3.1% on Wednesday, a day after the SEC announced the rule change. The iShares Global Timber & Forestry exchange-traded fund (WOOD) rose 1.5% on Wednesday. It’s beating 99% of natural-resources ETFs this year with a 16% total return, and has powered ahead of 99% of rivals over the past five years with a 14.4% annualized gain.

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